Created by FindLaw's team of legal writers and editors | Last reviewed June 20, 2016
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"Pyramid" and "Ponzi" schemes are both types of investment fraud, and both are illegal in Kentucky.
In a classic pyramid scheme, members make money solely by recruiting new participants into the scheme. Generally, new recruits are convinced to join by the promise of high returns in exchange for paying a sign-up fee and then recruiting other people to do the same. The pyramid system can only function so long as enough new members are recruited to pay out the existing members. When there aren't enough new recruits then the whole system comes crashing down.
Pyramid schemes come in many forms but they all function based on recruiting new members and not on any real investment or sale of goods. Often it can be hard to spot a pyramid scheme because the organization appears to sell a product, but sometimes these products are only sold to hide the organization's pyramid structure.
Common Examples of Pyramid Schemes:
The following table highlights Kentucky's pyramid scheme law.
Code Section |
Kentucky Revised Statutes section 367.832: Pyramid Sales Act |
What's Prohibited? |
Establishing, promoting, operating, or participate in any "pyramid distribution plan." |
What's a "Pyramid Distribution Plan?" |
Any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation (or things of value) in return for inducing other people to become participants in the program. |
The term "Ponzi scheme" is named after Charles Ponzi, a con artist of the 1920s. Ponzi schemes and pyramid schemes are similar in that they are both scams that rely on fees from new investors in order to pay out existing investors. However, the difference lies in the structure of the organizations. In a pyramid scheme the initial recruiter only needs to recruit the first round of investors (who then in turn go out and recruit more members), but in a Ponzi scheme the creator manages the fraudulent investment service and entices as many investors as possible to join.
State laws change frequently. For case specific information regarding Kentucky's pyramid and Ponzi schemes contact a local consumer protection lawyer or criminal defense attorney.
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